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Tips for Investing in Penny Stocks

Tips for Investing in Penny Stocks

If you invest in the stock market, chances are you've considered investing some money in penny stocks. Penny Stocks can provide stock market traders the chance to make a lot of money. There are however more risks involved than in more traditional Blue Chip or Dow 30 stocks so it's wise to learn as much as possible before taking the dive into Penny Stocks.

What are penny stocks?

Penny stocks are those stocks that are usually purchased for less than a dollar per share. These highly speculative stocks come from companies that have an erratic or uncertain history, so investing in them carries a great deal of risk.

However, these is also the potential to make a good deal of money with penny stocks. But before you rush out and spend money on them, keep in mind the following tips for investing in penny stocks.

Know the risks

As with anything, if it sounds too good to be true, it probably is. Penny stocks come from companies that are just starting out and are not established yet. Or, for a variety of different reasons, they may not have an IPO yet. This shouldn't discount you entirely from investing in penny stocks, but it's important to know that there are a significant number of risks associated with it. For that reason, you should research the company and know just what exactly you are investing in.

Look at the trading volume

Another important thing to take into consideration is the trading volume of the stocks. Instead of looking at the average volume, which is not always very telling, look instead for a consistent high volume of shares that are being traded. This is important because if you plan on getting a decent return from your money, the stocks should be trading at a consistent volume. You never want to purchase stocks that have no volume. This will result in an even lower selling price.

Research the company

It is vital that you do your research into the company that is unloading their penny stocks. Companies that know how to make a profit will use that money to expand their business, which will in turn increase the overall shareholder value and make the stocks more valuable. You will also want to look at why they are losing money. Manageable types of loss, like those associated with companies just starting out, are not as much of a threat as those that have to get additional financing, which in turn results in an even lowered value of your shares.

Be careful with how much you invest

Many investment advisers and stock experts recommend investing no more than 20% of your portfolio in penny stocks. Putting too much of this capital into risky stocks can raise your chances of losing your capital altogether. Sticking to just 20% is a good way to keep your capital while taking chances on the penny stocks at the same time.

Have a plan

Because penny stocks are so volatile, it's good to have a plan and stick with it. Let's say you invest in a stock for $1 and sell it for $1.20, you've made a 20% return. But a 20-cent decline will also give a 20% loss. This can add up over time. Make a plan to sell at a certain price and lock in your profits.

Many investors consider investing in penny stocks because while they are risky, there is the potential to make a good return on your investment. The above tips will help you to make the smartest decisions when it comes to investing in penny stocks.